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Safety Nets and Moral Hazard in Banking

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Financial Stability in a Changing Environment

Abstract

In banking,’ safety nets’ refer to government guarantees provided to depositors and sometimes to all bank creditors. When some banks are considered to be ‘too big to fail’, and therefore are given assistance, the safety net covers all of the bank’s stakeholders, including customers, employees, and (usually to a lesser extent) stockholders. ‘Moral hazard’ refers to the adverse incentives engendered by these safety nets. Because they do not fear losing their funds, depositors and possibly other creditors do not monitor banks as carefully as otherwise. In the absence of other constraints, bank owners and managers, therefore, have incentives to take greater risks than they would have taken, without the safety net. The essential questions considered here are how costly is the problem, and what can and should be done about this situation?

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Authors and Affiliations

  1. Business School and Department of Economics, Emory University, USA

    George J. Benston (Harland Professor of Finance, Accounting and Economics)

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  1. George J. Benston
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Editors and Affiliations

  1. Institute for Monetary and Economic Studies, Bank of Japan, Japan

    Kuniho Sawamoto (Director) & Zenta Nakajima (Deputy Director) (Director) &  (Deputy Director)

  2. Matsuyama branch of the Bank of Japan, Japan

    Hiroo Taguchi (General Manager) (General Manager)

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© 1995 The Bank of Japan

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Benston, G.J. (1995). Safety Nets and Moral Hazard in Banking. In: Sawamoto, K., Nakajima, Z., Taguchi, H. (eds) Financial Stability in a Changing Environment. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-13352-9_9

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